First Rental- basic math

15 Replies

First investment property. Choosing between two newly developed units in Utah. 15-yr mortgage. Breakdown:

  • SALT LAKE COUNTY (near main I-15 freeway):
    • 2-bedroom: $220k (not including any other closing fees), projected monthly rent $1,600+, monthly HOA $100+, common/shared swimming pool.
    • 3-bedroom: $250k (not including any other closing fees), projected monthly rent $1,800+, monthly HOA $100+, common/shared swimming pool.
  • WASATCH COUNTY (near local public high school):
    • 3-bedroom: $245k (not including any other closing fees), projected monthly rent $1,600+, monthly HOA $125+, onsite property management fee (screening, leasing, marketing, managing) $100/month, common/shared swimming pool and sport court.

The market in Utah is not as prime as most markets but I'm choosing to stay here with my first investment. What am I missing or are there superior opportunities? I prefer a newer unit so I don't have to hire property management the first few years and I don't have to really fix anything. I encourage ALL feedback! Thanks!

@Nate W. Hi Nate, Have you figured out what you debt service will be on these. You need to get a top line of gross revenue and then subtract costs. These cost can be the mortgage payment, HOA if you are going to pay it and not the tenant, any utilities you may be paying, insurance, and you will want to plan for a reserve of something.

Take the gross revenue and subtract the expenses from it and see if it has cash flow. 

You can use the BP calculator to figure a lot of this out. 

How much are you putting down?  

Anything less than 20% down on a 15 year mortgage, plus taxes, insurance, and HOA (plus something for reserves) is going to be pretty darn close to break even - if not negative. You will really need to shop lenders and rates to get cash positive on the 15 year term.

More likely to work out on a 20 or 30 year.

Hi Nate.  Of the 3 options, the 3 bedroom in Salt Lake has the best numbers, however with 20% down on a 15 year mortgage they all cash flow negative according to my best guestimates.  The most important thing to do on any investment is to run the numbers.  PM me and I can send you a good deal analyzer spreadsheet so you can run the numbers yourself.

If you ever want to look in the Cleveland Ohio area... near Cleveland clinic.... much cheaper, no HOA... let me know

To me those numbers just dont make sense.  My current rental I have a mortgage of 86k and 50k cash into property and rent is $1450.  Even if I refinance I would still be way farther ahead than you would be.  Are you investing for appreciation or cash flow?  If cash flow I would not be looking at those price points but thats just my thoughts.  

ouch, I don't see any deals here. I plugged each of them into my spreads and none cash flow even at 30 years. (using 45% expense ratio)

price/rent ratio is too high

hoa is costly / non-amortizing fee

15 year mortgage is going to take the cash flow from red, to actually bleeding off the page.

I appreciate all who have contributed their valuable insight! I have been looking into 30-year mortgages and it looks like at a 25% down payment I will be at 4.5% mortgage rate ($2,500 closing fees) and a $950 monthly payment. Assuming insurance, HOA and management fees, taxes, and more, this is certainly going to be close to break even. I wish it were a better market in UT for rentals unless I'm looking in the wrong areas. Where are we seeing better returns? I assume I shouldn't be looking at new properties and that it's too competitive in Salt Lake, Utah, and Wasatch Counties.

@Alexander Felice do you think 45% expenses is a bit high? I am using 30% for expense and CAP X as my measure but then again I try to tackle any major work myself which definitely helps keep things profitable.

Originally posted by @Scott Bowles :

@Alexander Felice do you think 45% expenses is a bit high? I am using 30% for expense and CAP X as my measure but then again I try to tackle any major work myself which definitely helps keep things profitable.

 I think 45% is low actually for total expenses

taxes, insurance, capex, vacancy, management, maintenance. If you can keep it at 45% you're doing good, in the long run it usually evens out to 50% (hence the 50% rule)

also, doing work yourself doesn't save you money, it just means you're paying yourself the market rate. Which is fine, but you trade your time for income which is the exact opposite reason for buying real estate. The goal is for it to be passive. It also gives you a skewed version of profitability because instead of taking the maintenance/capex costs and showing them as expenses (which they are, albeit paid to yourself) you're likely not showing them at all and getting a higher FALSE profit margin.

the cost to build a roof is set by the market. whether you pay yourself or pay someone else doesn't change the value of the work. It's also unlikely you can do the work more efficiently than a professional so in reality doing the work yourself usually costs you money, depending on how you value YOUR time.

@Alexander Felice I thought you were just talking about repairs and CAP X, nothing else. My total expenses are definitely projected higher then 30%. Yeah I hear yah about the passive part and one day it may not be worth my time to do work myself, however I like it and I am definitely not there yet, more in the grinding stage haha. Cheers thanks for the feedback!

Great advice. Using a 50% Expense Rule all of these options are in the red. Where are we seeing better opportunities in Utah (or neighboring areas)? It seems to me the market is way too hot for rentals unless you invest a lot of time and energy in finding hidden opportunities? What about partnering with a fix-and-flipper (I assume it will be a similar result in a hot market)?

@Nate W. There are still plenty of good rental deals available in Utah, single families are easy to find, a little rehab and you can get them cash flowing well. You could do without the new development + HOA though.

@Nate W.


I've been buying rentals in Salt Lake, Tooele and Davis Counties for the last 18 years. 
And you're right Utah is a hot market and extremely hard to cash flow.

I moved my company to Michigan, which has allowed 9% to 14% ROI's.

If your looking to stay in your own backyard and willing to work extremely hard, then you will find some cash flowing rentals (easier said than done but possible). Or if you're comfortable buying out of state then look at the mid west and eastern markets. Just do your homework on any turn key provider.

Good Luck!

Well there's the market question, but more so....can you look at properties without HOA? That's just a start. Every major market has sub-markets, and each sub-market cash flows better or worse than the others, so playing around with the sub-markets but then going after properties without HOA would be beneficial. HOA and condo fees have never done cash flow investors any favors.

A common saying in RE investing is, "The easiest way to make a million bucks is to borrow a million bucks and let other people pay it back." It looks like that's your strategy with these kinds of rentals but little to no cashflow can be very precarious.

Great deals are few and far these days. The best deals for instant equity and cashflow are wholesaler deals that need to close quickly and with cash. Those homes also usually need 10-20K just to get them rent-ready.  I bought 2 more of those in December in Kearns. House #1, (3 bed, 1 Bath) All in at 172K and rents for $1350/mo. House #2 (also 3 bed, 1 Bath) will be all in at 160K and rent for $1300/mo. You can find better numbers up in the Ogden area (right at the 1% rule) but the wrong house or druggie tenants can kill you. 

Whatever you do, have fun out there!

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